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In handling discharge of indebtedness, the line between solvency and insolvency is of critical importance. If a debtor is insolvent, the debtor does not have discharge of indebtedness income although the debtor must “bleed” by reducing tax attributes and reducing the income tax basis of assets. In the event the debtor is solvent, with two exceptions, a debtor with discharge of indebtedness has ordinary income. Those exceptions are for real property business debt and qualified farm indebtedness.

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